Evading sanctions through deceptive shipping practices

Bad actors use various ways to circumvent sanctions, among them are deceptive shipping practices. Such practices affect the maritime industry, and every company involved in international trade, so an awareness of them is crucial to avoiding risk.

Ninety percent of global trade involves maritime transportation, which makes the shipping industry a prime target for bad actors. The US government has identified several deceptive shipping practices that could be used to evade sanctions.

1. Signal disablement or manipulation
   Vessels engaged in illicit activities may intentionally disable their automatic identification system (AIS) transponders or manipulate the data transmitted to disguise their movement. Vessels can broadcast a different name, International Maritime Organization number, Maritime Mobile Service Identity, or other identifying information. This practice is called spoofing.
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2. Physical identification altering
   Bad actors can paint over a vessel’s International Maritime Organization number or name to hide its identity or impersonate other vessels.
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3. False documents
   Documents can be falsified to disguise a shipment’s origin. Shipments of petrochemicals, petroleum, petroleum products, steel, iron, and sand are especially at risk of falsified documents.
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4. Ship-to-ship transfers
   Ship-to-ship transfers at night or in high-risk areas are used to circumvent sanctions by concealing the origin or destination of goods – particularly petroleum, coal, and related materials.
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5. Voyage irregularities
   Unnecessary indirect routing, unscheduled detours, or transit or transshipment of cargo through third countries may indicate sanctions evasion.
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6. False flags and flag-hopping
   Bad actors may misrepresent vessel flags or repeatedly register with new flag states to avoid detection.
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7. Complex ownership or management
   Criminals take advantage of the complexity of the shipping industry by involving shell companies or several ownership and management levels to disguise ultimate beneficial ownership. They may frequently change companies’ ownership or management to avoid detection.

Evading oil trading sanctions

Deceptive shipping practices are used to circumvent sanctions on oil, and OFAC has described such practices in high-risk areas.

In September 2019, OFAC sanctioned Maritime Assistance LLC for facilitating the sale and delivery of jet fuel to Russian military forces operating in Syria. In neighboring Iran, common tactics include obfuscating the origin, destination, and recipient of oil shipments.

UN sanctions limit North Korea to importing 500,000 barrels of petroleum per year. However, the US government estimates that in 2019, North Korea received nearly 3.89 million barrels. Most of these imports came via ship-to-ship transfers in Chinese territorial seas.

Best practice for financial institutions

Deceptive shipping practices affect shipowners, brokers, chandlers, flag registries, port operators, freight forwarders, classification service providers, commodity traders, insurance companies, and vessel captains.

However, given the reach of OFAC’s jurisdiction, the prevalence of the US dollar, extraterritorial sanctions, and OFAC’s increased enforcement efforts mean they also affect financial institutions and companies involved in international trade. Everyone should be aware of common global transport red flags and adopt best practices.

1. Institutionalize sanctions compliance programs
   Private-sector companies should implement comprehensive sanctions compliance programs.
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2. Establish AIS best practices and contractual requirements
   Companies should research a ship’s history to find previous AIS manipulation and monitor for AIS manipulation.
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3. Monitor ships throughout the transaction lifecycle
   Ship owners, managers, and charter companies should monitor vessels, including those leased to third parties, throughout a transaction.
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4. Know your customer and counterparty
   Flag registry administrations, insurers, financial institutions, managers, and charterers should conduct risk-based due diligence.
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5. Exercise supply chain due diligence
   Parties should ensure recipients and counterparties to a transaction are not engaging in sanctionable activities by implementing origin and recipient checks for ships that conduct ship-to-ship transfers, particularly in high-risk areas.
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6. Contractual language
   Entities should incorporate best practices in contracts related to commercial trade, and financial and business relationships in the maritime industry.
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7. Industry information sharing
   Industry groups should provide relevant information and share it broadly with partners, other members, and colleagues –for example, when an insurer finds illicit or sanctionable activity or new sanctions evasion tactics.

How Moody’s Analytics KYC can help

Vessel data

To avoid risks posed by bad actors in the global shipping industry, you need comprehensive vessel data that will help you work to the recommended best practice and control risk.

Orbis contains comprehensive shipping management information, including registered owners, ship operators, and technical managers, curated from leading maritime intelligence company IHS Markit. 

In addition, GRID monitors lists containing internationally sanctioned vessels and maritime stakeholders and covers adverse media on vessels and related shipping management involved in criminal and suspicious activity.

To find out more about how Moody’s Analytics KYC can help you – please get in touch.